Why America's Biggest Defense Contractor Loves Computer Viruses

Late last month, DARPA -- the Defense Advanced Research Projects Agency -- announced an intriguing award given to the nation's biggest defense contractor, Lockheed Martin (NYSE: LMT) . For $14.2 million, Lockheed Martin will construct and operate the U.S. Army's National Cyber Range, a virtual world where viruses of all shapes and sizes can roam free.

Designed as a "secure, self-contained facility where complex defense and commercial networks can be rapidly emulated for cost-effective and timely validation of cyber technologies," NCR was begun with the help of a $5.4 million grant awarded to Lockheed Martin back in 2009.

In that first phase of the project, Lockheed drew up the concepts for the Cyber Range's design and operation, along with detailed engineering and system demonstration plans. Now, in the second phase, the defense contractor will build and evaluate prototype ranges in which the military can "assess and validate leap-ahead cyber research technologies and systems."

The goal: To develop "highly effective cyber weapons and defenses" for the nation's military.

Why would we want that?Last month, the U.S. Department of Justice filed a 56-page indictment against five Chinese military officers. Working for Beijing's obscurely named "Unit 61398," alleged the DOJ, these hackers had broken into the computer systems of five U.S. companies -- Westinghouse, SolarWorld, Alcoa, Allegheny Technologies, and U.S. Steel -- and stolen large amounts of commercial secrets with the aim of passing the data on to Chinese competitors.

Bad as this sounds, it's only the tip of the iceberg. Internet security company FireEye (NASDAQ: FEYE) says it has detected thousands of similar incidents. Chinese military officers are hacking into everything from U.S. commercial companies, to defense contractors, to the Pentagon itself. (On the other side of the coin, there's more than a little evidence that the U.S. security services have engaged in computerized warfare escapades of their own).

So, you can easily see why this is an area that the DefenseAdvanced Research Projects Agency might be interested in exploring further.

Time for some paybackLockheed also has a dog in this fight. In 2009 -- around about the time it got tapped to begin drawing up plans to build the NCR for DARPA -- Lockheed was hit with a hack attack from beyond U.S. borders. Then as now, the culprits were believed to be agents of the Chinese military, who made off with "several terabytes" of data regarding the company's new F-35 stealth fighter jet. The company had sunk billions of dollars into developing the jet -- and in the blink of an eye, some hacker took it all away for free.

Two years later -- surprise, surprise -- China debuted its own stealth fighter jet, the J-20.

What it means to investorsSo, Lockheed has a personal stake in improving cyber security. It also has the tools to succeed with the new DARPA project. According to Forbes, Lockheed Martin isn't just the nation's biggest defense contractor, it's also the top federal provider of information technology and services, and has been so "for nearly 20 years."

S&P Capital IQ data show that the company's mission systems and training division, home to the simulation, training, and support unit that runs NCR, booked $8.1 billion in revenues last year. That made it Lockheed Martin's third-biggest revenue generator. And with an 11.1% operating profit margin, MST is also the company's third most profitable division.

Granted, the $19 million and change that DARPA has contracted to pay Lockheed Martin for its work on NCR won't "move the needle" on this business much. But it will give the company an opportunity to get better at cyber security, building thatbusiness, and further securing revenues and profits at Lockheed's even bigger, more profitable aeronautics division (which builds the F-35). And the government will be paying Lockheed to develop the expertise.

Only $19 million? Sure. But that's better than a sharp stick in the eye.

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